UPDATE 1-Top SEC official raps U.S. risk council for seeking to grab power

Reuters Staff

4 Min Read

(Adds comment from Treasury spokeswoman in last paragraph)

By Sarah N. Lynch

WASHINGTON, May 15 (Reuters) - A top U.S. Securities and Exchange Commission official on Thursday railed against the U.S. regulatory risk council for trying to grab the SEC’s power in a “dangerous” quest to impose tougher rules on large asset managers.

SEC Republican Commissioner Daniel Gallagher vented his frustrations in a nine-page comment letter about the Financial Stability Oversight Council (FSOC) and its independent research arm, saying the FSOC is trying to impose bank-like rules on investment funds.

“I hereby register a vote of NO in the court of public opinion on the issue of whether to designate asset managers,” Gallagher wrote.

“The FSOC process itself is far more dangerous to our financial markets than the purported risk factors it was purportedly created to address.”

Gallagher’s letter is unusual for an SEC commissioner. Typically a commissioner does not submit formal comment letters on matters in which the SEC is soliciting public feedback.

On May 19, the FSOC will hold a public roundtable of industry experts and academics to review the asset-management industry’s activities and potential risks. BlackRock Inc and Fidelity are among some of the largest asset managers.

The FSOC, chaired by Treasury Secretary Jack Lew and made up of the heads of all financial regulators, can dub large financial firms as “systemic” and subject them to Fed oversight if it thinks they are too risky.

SEC Chair Mary Jo White, Federal Reserve Chair Janet Yellen and other regulators sit on the council. Board and commission members, such as Gallagher, are not FSOC members and do not get a vote in the designation process.

That has been a major sticking point for Gallagher and two fellow SEC commissioners, who have all complained they are shut out of private FSOC meetings and have no voice there.

The dispute intensified last year after the FSOC’s research arm, the Office of Financial Research, released a report on asset managers, who are regulated by the SEC.

Gallagher and others at the agency viewed the report, which found that herding behavior and leverage at asset managers could pose systemic risks, as an attempt to usurp the SEC’s authority. The Treasury Department, which houses the FSOC and its research unit, disputes this.

In a protest, the SEC last year issued the report for public comment, opening the door for a stream of major criticism from the fund industry and Capitol Hill.

Gallagher’s letter on Thursday, which was added to the SEC’s online comment letter file for the asset-management study, was highly critical of the report’s findings.

“The end product was a botched analysis that grossly overstates ... the potential risks to the stability of our financial markets posed by asset management firms,” he wrote.

A Treasury spokeswoman said: “Rather than prematurely terminating an inquiry into potential threats posed by this industry, the Council believes that further consideration is warranted.” (Reporting by Sarah N. Lynch; Editing by Richard Chang, Sandra Maler and Jan Paschal)